March 2018
Adam Burn
From April 2018, millions of employees will see the amount they contribute to their workplace pension automatically increased, but few realise that they can take control of how it’s invested.
In April changes are afoot in the world of workplace pensions. Under automatic enrolment, the government’s pension saving programme, employers will contribute 2 per cent, increased from the current 1 per cent and employees will be required to contribute a minimum of 3 per cent, where currently it’s 1 per cent, unless they choose to opt out of the scheme.
Adam Burn, senior DC consultant at Aon Employee Benefits explained: “The regulations state the minimum contributions required in total and by the employer. The employee requirement is inferred (the balance) but many employers choose to pay higher than statutory levels meaning the employee requirement is lower. For example, where an employer uses a matched basis the contributions may be increasing to 2.5 per cent for each.”
The changes will start on 6th April and reflect worries that the nation is “dramatically under-saving for retirement”, according to an article in the Telegraph.
There is still widespread ignorance about pensions, the article suggested. It said: “Many people simply never look at their pension. While some companies offer generous perks, many receive the bare minimum employer contribution. Some may be left languishing in unsuitable investments”.
The Telegraph offers ideas on how to take control of your pension investment with a caveat that its suggestions refers to defined contribution pension plans, rather than defined benefit plans, also known as final salary pensions.
The article promises to help savers ’find out the state of your workplace pension, maximise the value of your contributions and take control of how they are invested’ in four points.
Firstly, and importantly, find out who the firm’s pension provider is. Speak to the human resources or the pension department or ask the boss. Employees are likely to be given documentation or have access to an online portal. It recommends finding out your log in details. Go back in time to past employers where you may have other pension pots. Contact them and find out how much it’s worth and where the funds are invested. Ask the providers for details on how to transfer the money into one pot and if there are any charges for doing so.
Secondly, learn what you’re contributing and how much you have to date. Some employers will contribute more than the minimum if you pitch in more too.
The article suggested: “A target to aim for is to maximise the amount your company contributes to your pot. For instance, if its maximum contribution is 7 per cent, which requires you to contribute 7 per cent too, you should take advantage if you can afford it. The company's extra contribution is free money.”
And if the employer doesn’t, the tax relief you receive on your contribution is still a win-win.
Ask your pension department or pension provider how much you currently have. Ask your employer where to find it. You may be able to view this online, and the deduction will appear on your payslip – although the company contribution will not, explained the article.
The third point, the article stresses, is to find out how your money is invested. It’s usually available online.
And finally, the fourth point, suggested that you have a choice. If you want to change how your pot is invested, look into options available. Your pension provider may only offer one option, or your company might offer in-house financial advice or you are able to do your own research to find the best option. But it’s best to seek financial advice whatever you do.
Aon’s Burn urged employers to do what they can to get people engaged in pensions, particularly as contribution levels are set to rise over the next two years.
“The reality is that someone’s pension fund is, along with their home, is likely to be one of the two most valuable assets they ever hold, so maximising the value should be paramount,” Burn explained.
It is a ‘no brainer’ to increase personal contributions where affordable to a level which ensures employer contributions are the highest amount possible, he added.
Commenting on investment funds, Burn advised employees to research potential funds and look into how their pension contributions are invested as scheme default funds tend to be designed for an ‘average’ scheme member rather than tailored for each employee.
Employees should also check the retirement age schemes have recorded (known as Selected Retirement Age, SRA) as many investment strategies automatically switch funds into lower risk investments from a set point before the SRA.
“If your SRA doesn’t correspond with the age that you are actually planning to take pension benefits you risk this transition happening too early or too late in the journey to retirement,” Burn warned.
Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN.